Frivolous lawsuits clogging U.S. courts, stalling economic growth

Americans’ litigiousness and thirst for massive damages has been a boon to the legal profession. But some researchers and litigation experts warn that the abundance of lawsuits—many of them frivolous—flooding U.S. courts is severely weakening the economy.

According to consulting firm Towers Watson, the direct cost of the U.S. tort system in 2009 was approximately $250 billion, which was roughly 2 percent of the gross domestic product. The amount is double the estimated tort expenses in other countries, including the U.K. and Japan.

In May, the House Judiciary Committee held a hearing that explored excessive litigation’s effect on the United States’ global competitiveness. During his testimony, Skadden Partner John Beisner explained that plaintiffs counsel engage in five types of litigation abuse that ultimately undermine economic growth: improperly recruiting plaintiffs, importing foreign claims, filing suits that piggyback off government investigations and actions, pursuing aggregate litigation and seeking third-party litigation financing.

“America’s litigious nature has caused serious damage to our country’s productivity and innovation. … The root cause is that we have created incentives to sue—and to invest in litigation—instead of establishing disincentives for invoking judicial process unless absolutely necessary. Other countries discourage litigation; we nuture it,” Beisner said at the hearing.

Many litigation experts resoundingly agree with Beisner’s stance on the necessity of tort reform to ameliorate the country’s economy.

“The entrepreneurial system that we’ve developed for litigation in this country has always been an impetus to bringing cases that are close to the line or even over the line,” says Dechert Partner Sean Wajert. “When you have that kind of encouragement, you have a slippery slope, which sometimes people will slide down and get into questionable and even abusive and frivolous claims along the way.”

The result is clogged courts and corporate funds that finance defense costs instead of economic investment. Small businesses and startups with less than $20 million in revenue suffer the most because they pay a higher percentage of their revenues toward tort costs than larger companies do, and therefore they become less able to invest in research and development, create new jobs, and give raises and benefits to employees.

One proposed solution to frivolous litigation is the Lawsuit Abuse Reduction Act (LARA), introduced in March in the House as H.R. 966 and Senate as S. 533 by House Judiciary Committee Chairman Lamar Smith, R-Tex., and Senate Judiciary Committee Ranking Member Chuck Grassley, R-Iowa, respectively. The bill would revise and strengthen portions of Rule 11 of the Federal Rules of Civil Procedure, which provides for sanctions against parties that file unwarranted or harassing claims.

Proponents say LARA would increase plaintiffs’ accountability for meritless lawsuits and deter future frivolous claims. However, the bill faces some opposition and obstacles to becoming law.

Rule Revisions

In 1993, lawmakers made three major changes to Rule 11 in an attempt to reduce the number of motions for sanctions and more quickly conclude federal cases. But critics say the revisions significantly weakened Rule 11 and enabled litigation abuse. LARA essentially would undo the 1993 revisions, which are still in effect today.

First, Rule 11 allows judges to use their discretion in imposing sanctions for meritless suits rather than making such sanctions mandatory. Many critics disagree with this optional penalty. “If the case doesn’t meet certain standards and shouldn’t have been filed in the first place, then there ought to be consequences,” Beisner says.

Second, Rule 11 grants plaintiffs a 21-day “safe harbor” period to withdraw a claim without incurring any penalties when defendants notify them that they’ll be seeking a motion for sanctions. Supreme Court Justice Antonin Scalia said the change would allow parties to file “thoughtless, reckless, and harassing pleadings, secure in the knowledge that they have nothing to lose: If objection is raised, they can retreat without penalty.”

“The problem [with the safe harbor] is that it just allows certain plaintiffs attorneys to go on a ‘fishing expedition’ and dare you to file a motion for sanctions,” Wajert says.

Finally, because the rule is supposed to act as a deterrent for meritless claims, the court collects sanctions as monetary penalties instead of directing the money to defendants as compensation. Without reimbursement for court costs and legal fees, pursuing sanctions is often too costly for small businesses.

“The defendant has to spend time and money to hire a lawyer to research and draft the motion for sanctions and present it to the other side, so there is a cost involved even if the plaintiffs end up withdrawing the action,” Wajert says.

To boost liability for parties that file questionable suits, LARA would make sanctions mandatory for any claims that judges recognize as frivolous. LARA also would eliminate the 21-day safe harbor and award some of the sanction money to defendants.

Possible Glitches

Critics have four main arguments against LARA.

Some members of the law community say LARA doesn’t provide broad enough reform because it doesn’t emphasize lawyers’ prelitigation duties. “We might want to look at more accountability for failing to perform due diligence before a lawsuit is filed and for continuing to prosecute a lawsuit after learning the claims that are being asserted are invalid,” Beisner says.

Other LARA challengers claim the bill takes tort reform too far and “swats a fly with a hammer,” Wajert says. He notes that some opponents argue there’s not enough empirical evidence to suggest that litigation abuse is a serious problem; however, because frivolous suits often are quickly settled so as to avoid litigation expenses, it is difficult to collect meaningful statistics. “The same applies to the safe harbor,” Wajert notes. “If something is withdrawn and it never gets to the judge’s attention, and therefore never gets into a published opinion, how are we supposed to collect data on that?”

Critics also worry that LARA will lead to satellite litigation—or small trials within big trials—challenging sanctions issued by the courts. LARA supporters say that although there will likely be some additional litigation when the Act first becomes effective, suits will slow up once courts clarify how they are interpreting LARA.

A final contention against LARA is that it will deter valid lawsuits. But the Act’s proponents say litigants shouldn’t be afraid that judges will liberally issue sanctions. “The Act isn’t going to change the definition of a frivolous claim,” Wajert explains. “Judges are going to be careful to make sure that when they find frivolous, it really is frivolous. It’s unlikely that LARA will impact those that are arguing for a good-faith extension, modification or reversal of existing law.”

Victor Schwartz, a partner at Shook, Hardy & Bacon who testified at a congressional hearing about LARA in March, agrees. “LARA is not cutting off peoples’ rights to sue if they have a legitimate claim,” he says.

Winning Support

Schwartz says LARA stands a good chance of becoming law if it gets adequate support from Congress and the president.

A key factor in LARA’s advance is democratic support, which could be difficult because trial lawyers, who don’t support the bill, are some of the top funders of the Democratic Party. Additionally, the Senate has a democratic majority. Schwartz estimates that LARA would need the support of at least seven Democratic senators to pass.

Even if the bill were to reach the president’s desk, Schwartz says it probably wouldn’t pass speedily. Another fairly recent tort reform bill, the Class Action Fairness Act of 2005, took about eight years to become law, and Schwartz says that he has personally only been involved in four bills over 25 years that were signed by the president.

Nonetheless, Schwartz and other LARA supporters remain optimistic that LARA will succeed. “In the [Jan. 25] State of the Union address, the president said he agreed with the Republicans about [the need to reduce costs associated with] frivolous claims. He never endorsed LARA, but he did mention it in what was a very limited menu of topics. It would be unlikely that he would veto the bill,” Schwartz says.